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How to Rehabilitate Your Loans You will need to request rehabilitation from your loan holder. You may be dealing with a collection agency. Regardless of who you are dealing with, you should insist on getting the agreement in writing. As of July 1, 2014, the law requires written rehabilitation agreements. Be sure and read everything before signing. The main item to negotiate is how much you will have to pay every month. It has been very common for collectors to tell you that you have to pay an amount beyond what you can afford. This is wrong. The law says that you only have to pay what is reasonable and affordable. There is no minimum amount that the loan holder must charge. There are new regulations effective July 1, 2014 that create a new system to help ensure that borrowers are paying only what is “reasonable and affordable” for them. Beginning July 1, 2014, here is how the new system should work: The loan holder should discuss your options, including the pros and cons of loan rehabilitation and loan consolidation. If you decide on rehabilitation, the loan holder should start out with the amount you would pay under the IBR formula. This is the IBR formula for older loans, based on the borrower making student loan payments of 15% of disposable income. This does not mean that you are eligible for IBR while you are still in default. Instead, the loan holder will use the 15% IBR formula to determine a reasonable and affordable payment amount. If you successfully rehabilitate the loan, you can then request an income-driven repayment plan. If you object to this amount, you can negotiate a different payment, but you must use a standard form to provide additional income and expense information. Understanding the New Rehabilitation System as of July 1, 2014 Unless you object, the loan holder will use the 15% IBR formula to determine your reasonable and affordable payment amount. This does not mean that you are eligible for IBR. You may be able to get into the IBR program, but only after you complete the rehabilitation program. You can object to the IBR payment and request a lower amount based on your financial circumstances. If you take this route, be advised that your payment will likely increase after the rehabilitation period. At that point, you can request deferment if you qualify or forbearance if you cannot afford the regular IBR payments, but these are time limited options. You should think carefully about whether it is a good time to rehabilitate if you don’t think you will be able to afford the IBR payments. The loan holder will make an initial estimate of your reasonable and affordable payment based on the information you give them about your income. You will have to follow up and provide documentation of your income in order to get the rehabilitation started. The loan holder may tell you that you have to make a “good faith” payment while they are waiting for you to submit documentation of your income. This is your choice. You do not have to make this payment. However, you may want to do this so that you can get started with the nine month rehabilitation period. Be advised that these payments will count toward the nine months only as long as the final rehabilitation payment amount is not higher than the amount you are paying as a “good faith” payment. If you are having your wages garnished, you have a one-time right to have the garnishment suspended if you make five required rehabilitation payments. You may successfully make it through the rehabilitation process only to find that the loan holder has put you in a standard repayment plan with payments that you cannot afford. You should carefully track when the rehabilitation period is over. Once you have rehabilitated, your loan is out of default and you are eligible for any of the pre-default flexible repayment plans. Arrange for an affordable repayment plan with your lender so that the transition out of rehabilitation is as smooth as possible. Income-based repayment is available in both the FFEL and Direct loan programs. There will usually be a new servicer after your rehabilitated loan is sold. It is a good idea to ask your current loan holder to give you the name of the new servicer as soon as possible so that you can arrange for an affordable payment plan. Your FFEL lender may be unable to sell the loan after rehabilitation. You are required to keep making payments until a buyer is found. One way to deal with this problem is to consolidate with the Direct Loan program. You can then choose to repay through an income driven repayment plan. Your payments under these plans may be even lower than what you were paying to rehabilitate the loan. However, due to processing problems at the Department of Education, many borrowers experienced delays with Direct Loan rehabilitations. The Department claims it has fixed this problem. If you have any questions or concerns regarding Rehabilitating your Defaulted Student Loans, please post a new topic and member of our Creditboard community will assist you! Hodap2001